Dow, S&P 500 fall as dollar rises, yield curve flat

NEW YORK (Reuters) - U.S. stocks closed lower after choppy trade on Monday, as some investors showed signs of earnings season nerves, while political worries in Europe led the dollar to strengthen against the euro and sterling.

The euro continued its slide on uncertainty over Italy’s budget and the British pound fell on news that Brexit negotiations with the European Union over Northern Ireland remained in deadlock.

The U.S. Treasury yield curve was the flattest in more than two weeks, while two-year note yields hit their highest level in a decade. Gains in longer-dated notes were limited due to worries about rising inflation pressures and further U.S. Federal Reserve rate hikes.

Fixed income trading appeared to weigh on U.S financial companies, making the sector the biggest drag on the S&P 500. A flat yield curve tends to hurt bank profits.

The third-quarter earnings season and U.S. midterm elections were also dampening equity investor enthusiasm, along with the rising dollar, according to money managers.

“We’ve seen decent results but not universally and there are some negative issues companies have talked about,” said Tim Ghriskey, Chief Investment Strategist at Inverness Counsel in New York.

Investors should expect more volatility at least until U.S. congressional elections on Nov. 6, Ghriskey said.

“People are looking at the negatives and saying that it’s a situation where there are more headwinds. At least until the midterms, it’s going to be difficult to make any significant progress on the upside. The drift will be lower,” said Alan Lancz, president, Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio.

The Dow Jones Industrial Average fell 126.93 points, or 0.5 percent, to 25,317.41, the S&P 500 lost 11.9 points, or 0.43 percent, to 2,755.88 and the Nasdaq Composite added 19.60 points, or 0.26 percent, to 7,468.63.

U.S. EARNINGS

Investors looked ahead to the peak week for the U.S. earnings season, with Amazon, Alphabet, Microsoft and Caterpillar among the companies reporting.

Helped by a strong economy and deep corporate tax cuts, S&P 500 earnings per share are expected to grow 22 percent in the third quarter, according to Refinitiv estimates.

The dollar index rose 0.32 percent, with the euro down 0.41 percent to $1.1466. [USD/]

Sterling, meanwhile, was down 0.8 percent against the dollar. British Prime Minister Theresa May said the majority of Britain’s deal to exit the EU has been agreed upon but repeated her opposition to an EU proposal regarding the Irish border.

Benchmark 10-year notes last rose 1/32 in price to yield 3.1978 percent, from 3.202 percent late on Friday.

U.S. crude rose 0.42 percent to $69.57 per barrel and Brent was last at $80.11, up 0.41 percent on the day. [O/R]

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 22, 2018. REUTERS/Brendan McDermid

Spot gold dropped 0.3 percent to $1,221.97 an ounce.

After rising as much as 0.7 percent during the European session, stocks there ended lower as relief over Moody’s decision to keep Italy’s sovereign rating outlook stable was short-lived and the focus turned to Europe’s response to Rome’s budget plans. [.EU]

In China, Shanghai blue chips had gained 4.3 percent in their biggest one-day gain since November 2015, after Beijing promised stimulus support for stock markets in the world’s second-largest economy.